Some Highlights of 1965: Metals

US DEMAND AND SUPPLY: Markets for nonferrous metals continued strong in 1965 as consumption rose with the continuing expansion in business activity. Shortages developed for a number of the most important nonferrous metals as consumers, particularly smaller consumers who did not have long-term contracts with suppliers, were unable to secure enough metal at the producer's prices. In some cases the increased demand resulted in price increases. The producer price of copper rose from 35 cents per pound to 36 cents, and in the "outside market" (the market not supplied by major producers) rose to 60 cents per pound. Tin prices also rose significantly, but lead, zinc, and aluminum prices held nearly steady over the year.

The relative stability of US prices in 1965 as compared with 1964 was made possible in part by releases from the stockpiles held by the federal government. The largest releases contained 150,000 tons of zinc, 100,000 tons of copper, and 60,000 tons of lead. Certainly, near the end of the year, government announcements of possible great increases in the rate of stockpile releases were the major factor preventing a rise of 1/2 cent per pound in aluminum and a further 2 cent rise in copper. Releases of other metals in short suppLy, such as molybdenum, nickel, and mercury, were also made. Revaluation of the stockpile, which was continued during 1965, in light of nuclear rather than conventional warfare has indicated that the government is holding many metals in excess of need.

Markets in this country were also eased by some liberalization of imports of metals and metallic ores. The Tariff Commission found that the lead-zinc quotas, established in the late fifties when the domestic lead-zinc mining industry was in the doldrums, were no longer necessary, and President Johnson followed up to this finding by abolishing the quotas. At the same time, however, Congress extended a special price support program for small lead-zinc mines so that they could be phased out of production if the owners so wished.

This turnabout, from a buyer's market through 1962 to a seller's market since, has led some observers ro reopen the question as to whether world population growth and continuing industrialization will press inexorably on our mineral supply, inaugurating an era in which shortage and not adequacy will be the order of the day.

There is good reason to dispute this interpretation. Rather, the recent supply problems seem more likely to be the result of an almost unprecedented business expansion in United States and Europe coupled with some difficulties in adjusting supply to this higher level of demand. For one thing, primary producers apparently underestimated the extent to which new capacity would be needed. For another, strikes and political difficulties, largely in the developing nations, have held production significantly below attainable levels in the past two years. Finally, the attempt by the major producers to establish stable and uniform world prices for all sales may have masked demand pressures, particularly for copper and zinc, until too late. Nevertheless, this technique, known as producer pricing, finds much favor among large producers and consumers, and they can be expected to continue this approach to price stabilization.

Perhaps the best evidence that the situation represents only a short-run difficulty and bears little relationship to long-term adequacy can be found in the number of new mines and metallurgical plants that are just coming into production, or will be in production within a short time. The expanding capacity is a worldwide phenomenon, but it is particularly noticeable in the United States. The drawback of lower grade of ore in the United States is increasingly offset by the advantages offered by a stable political climate and the opportunity to use the most modern technological advances.

Several taconite plants have now been built along the Great Lakes to process what was formerly worthless iron silicate minerals into iron pellets that are superior to high-grade direct shipping ore as a blast furnace feed. Another taconite mine has opened in Missouri. Among nonferrous metals, new copper mines in the Southwest, several lead mines in Missouri, and a molybdenum mine in New Mexico are all due to begin production shortly. Among nonmetals, phosphate mining in the Southeast and potash and boron mining in the West are growing apace. Finally, there are a host of developments among the less important but more exotic minerals. These include the expansion of rare-earth mining in order to secure europium, which provides the red color in color television, and the proposed projects to recover magnesium, potash, sodium, lithium, and rubidium from the waters of Great Salt Lake.

THE "CHILEANIZATION" OF COPPER. The relations between host country governments and foreign investors in raw materials industries pose delicate problems. Until recently Chile presented a classic case of conflict between these parties—a dispute in which economic opportunities were foregone and the interests of neither party were well served. The apparent resolution of this dispute, in the making for more than a year by now, illustrates how the needs of investors and less developed host countries can be reconciled, given sufficient flexibility on both sides.

Chile is overwhelmingly dependent on copper as a source of foreign exchange earnings, and government's aspirations to improve the country's living standards hinge to a large extent on these exchange earnings. However, the exploitation of the copper resource has been chiefly in the hands of US firms who in turn have felt so hampered by Chilean tax and regulatory policies that they have withheld new investment. Interacting with these forces are trade union pressures which have permitted copper miners to claim wages equal to five times the Chilean coal miners' scale, a widespread mystique about mineral resources which conceives of foreign operation as a loss of national treasure, and a domestic political division too rigid to permit easy compromise on important issues. The whole picture was most unpromising.

Despite difficulties in the negotiating and legislative processes that lie ahead, a solution to the dilemma now appears to be in sight. It may have significance for related situations in other areas.

A major concern of the Chilean government is with increasing foreign exchange earnings and fiscal revenues. Three paths might be considered:

1. Claim an increased share from existing operations.
2. Increase revenues by raising prices.
3. Increase revenues by increasing production.

Imposition of higher taxes and royalties on existing operations apparently reached a point of diminishing returns over the past decade and impaired the expansion of the industry. Outright nationalization as a means of increasing the country's share in copper revenues is contrary to the principles of the existing government. And principles apart, it would jeopardize relations with the United States and shut off needed sources of investment funds.

There are limits to the ability of one country to influence price, for this requires the cooperation of competing suppliers and, if successful, carries the hazard of loss of markets to competing materials. There seems to be more hope of dampening the considerable fluctuations in copper prices than of significantly raising the price. Nonetheless, the Chilean government currently is attempting to influence the world price for copper. It remains to be seen whether this will succeed over a longer period. The release of large stockpile tonnage by the US government shortly before the end of the year may be taken as an indication that there are at least heavy obstacles along that path, though serious trouble in Rhodesia affecting Zambia could offset these.

Chile's greater effort, however, is in the direction of increasing output. In view of the political and trade union situation in Chile it would have been difficult for the government, even if willing, to give effective guarantees to foreign enterprises which would induce needed investment. Beyond this, the government felt that for both economic and political reasons more direct national participation was essential in enterprises which provide over two-thirds of the country's foreign exchange. "Chileanization" of copper is a recognition of these facts on the part of both the government and the companies.

Through the government's association in their enterprises, the companies hope to gain stability which will justify additional investment. Circumstances vary for each company, and this is reflected in the basic agreements. For example, Anaconda, which is highly dependent on Chile as a source of copper, will maintain control of its existing operations in Chile but will enter into partnership with the government in a major expansion. Kennecott is less dependent on Chile and is anxious to stabilize a troublesome operation; accordingly it will grant the government a majority interest in an expanded total operation. The companies expect that with the government as a partner they can gain more sympathetic treatment in the areas of taxation, exchange regulation, etc.

If the plan is carried out successfully it will reverse Chile's diminishing role as a supplier of copper, raising output from the 600,000 to 700,000-ton range to over 1 million tons by 1970 and subsequently to 1.2 million tons—enough to make Chile the world's largest producer. Moreover, the proportion to be refined within the country will be raised sharply with tonnage increasing from 275,000 to 700,000 tons. Apart from changes in prices, it has been estimated that by 1970 the expansion will boost Chile's exchange earnings from copper by over 60 percent. Total investment of $450 million will be required, most of it provided by the companies or through international loans.

ORES FROM DOWN UNDER. Long known as an agricultural producer, Australia also is assuming increased importance as a source of minerals. In a country so lightly populated as Australia, development of mineral industries for export appears logical, since local industry will not be able to absorb the potential production. Nonetheless, up to the present Australia has displayed an ambivalent attitude toward mineral exports. In common with many other raw material suppliers, it has discouraged exports of raw ores and, instead, has sought to carry treatment of the raw product as far as possible in order to enhance the domestic product and foreign exchange earnings. This policy, while retaining much force, has been severely bent by the weight of recent ore discoveries.

Perhaps the outstanding recent development is Australia's forthcoming entry into the world market as a supplier of bauxite and alumina. Based on the enormous reserves of bauxite at Weipa on the Cape York Peninsula and to a lesser degree at Gove and the Darling range, Australian bauxite already is entering world trade. Bauxite reserves at these sites, while not fully explored, will comprise about half of the world's known deposits if present indications are confirmed. Estimates for Weipa alone are as high as 3 billion tons of ore—which, by commonly used rule of thumb, yield 3/4 billion tons of aluminum, or several hundred times current US production. Smaller deposits elsewhere are sufficient to supply the existing Australian aluminum industry which in turn meets all domestic needs. Therefore, if these huge reserves are to be used in any near future they must be devoted to export trade. Already bauxite production has mounted from minor amounts a few years ago to nearly 900,000 tons in 1964, and it will go far higher.

While some will be shipped as ore, Australia's distance from consuming centers and the cost of transportation are such that refining into the intermediate product, alumina, will facilitate exports. It will also add greatly to the value of product shipped. Australia is well positioned to do this refining because it has necessary moderate-cost fuel sources and offers a favorable investment climate. A major alumina plant oriented to the investment market already is under construction at Gladstone, in Queensland. The country is less well equipped to smelt aluminum for the export market because its power costs do not appear low enough to make such metal competitive. Consequently, Australian smelters have been limited to plants aimed at the local market. The government has been pressing hard for greater Australian ownership participation in the industry and for more local processing at all stages of the industry.

A second major Australian mineral development relates to iron ore. Blessed with accessible coal supplies and deposits of iron ore, Australia long has been one of the lowest-cost steel producers. However, known ore sources were limited. As a consequence, the industry has aimed chiefly at the local market and until recently the government forbade the export of iron ore so as to conserve it for domestic use. This policy was laxed as new deposits were discovered; recently it collapsed as the extent of new ore discoveries became evident.

Most of the newly discovered ore is in the remote northwest corner of the country. No one knows its full extent, but senior geologists have been cited to the effect that over 15 billion tons of high-grade ore have been established and much more is believed present. This is enough to supply the entire world industry for decades at present rates of use, and Australia's minuscule steel output of about 5 million tons per year cannot make use of such a vast resource.

The events of 1965 leave no doubt that Australia will before long produce substantially more than the 1 percent of world iron ore output for which it is currently responsible. Contracts or letters of intent have been signed for over 200 million tons of high-grade ore or pellets, all to be shipped to Japan over varying lengths of time. The largest of these concluded in 1965 relates to 100 million tons, with shipments scheduled to begin in 1969.

While there remains a determination on the part of the government to require local participation in developing the deposits and an aspiration to carry it to more advanced stages of processing, just as with aluminum, it nonetheless appears that foreign capital and enterprise will develop much of the ore for shipment with only a minimum of local processing. Port facilities are now being constructed to handle the largest carriers.

A third important mineral development is the petroleum discoveries in Queensland. Development of this field continues. Meanwhile, natural gas has appeared at various sites in Western Australia and Northern Territory as well as in Queensland. These fuel discoveries are especially welcome because petroleum and its products have comprised the predominant mineral import of the country for some time.